Feb
25
2025
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How to Calculate Portfolio Beta

By | Growing Wealth, invest, Investing | Comments Off on How to Calculate Portfolio Beta

Portfolio beta refers to a popular metric that investors use to measure a portfolio’s risk, or its sensitivity to price swings in the broader market. While past performance does not indicate future returns, knowing a portfolio’s beta can help investors understand the price variability of their stocks, or how much their holdings may move if there’s stock volatility or big gains in a benchmark index like the S&P 500.

Investors often consider beta a measure of systematic risk, or risk that stems from the entire market and that investors can not diversify away. Macro events such as interest-rate or economic changes often fall into the category of systematic risk, while idiosyncratic, stock-specific risk includes events like a change in company management, new competitors, changed regulation, or product recalls.

Key Points

•   Portfolio beta is a metric used to measure the sensitivity of a portfolio’s returns to market movements, indicating its systematic risk.

•   To calculate the beta of a portfolio, the beta of each stock is multiplied by its proportional value in the portfolio, and these products are then summed.

•   Stocks with a beta greater than one are more volatile than the market, while those with a beta less than one are less volatile.

•   Negative beta values indicate an inverse relationship to the market, which can be characteristic of assets like gold or defensive stocks.

•   Understanding a portfolio’s beta is crucial for investors aiming to manage risk in alignment with their investment strategy and market outlook.

How to Calculate Beta of a Portfolio

The Beta of a portfolio formula requires relatively simple math, as long as investors know the Beta for each stock that they hold and the portion of your portfolio that each stock comprises.

Here are the steps you’d follow to calculate the Beta of a hypothetical portfolio:

1.    Calculate the total value of each stock in the portfolio by multiplying the number of shares that you own of the stock by the price of its shares:

Stock ABB: 500 shares X $20 a share each = $10,000.

2.    Figure out what proportion each stock in their portfolio represents by dividing the stock’s total value by the portfolio’s total value:

Stock ABB’s total value of $10,000/Portfolio’s total value of $80,000 = 0.125.

3.    Multiply each stock’s fractional share by its Beta. This will calculate the stock’s weighted beta:

Stock ABB’s beta of 1.2 X its fractional portfolio of 0.125 = 0.15.

4.    Add up the individual weighted betas.

Here is the whole hypothetical portfolio with a total beta of 1.22, benchmarked to the S&P 500. That means when the index moves 1%, this portfolio as a whole is 22% more risky than the index.

Stock

 Value

 Portfolio Share

 Stock Beta Weighted Beta
ABB $10,000 0.125 1.20 0.15
CDD $30,000 0.375 0.85 0.319
EFF $15,000 0.1875 1.65 0.309
GHH $25,000 0.3125 1.42 0.44375
Sum 1.22

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4 Ways to Characterize Beta

Investors always measure a portfolio’s beta against a benchmark index, which they give a value of 1. Stocks that have a beta higher than one are more volatile than the overall market, and those with a beta of less than one are less volatile than the overall market.

Understanding beta is part of fundamental stock analysis. Once you know the beta of your portfolio, you can make changes in order to increase or decrease its risk based on your overall investment strategy by changing your asset allocation.

There are four ways to characterize beta:

High Beta

A high beta stock — one that tends to rise and fall along with the market often — has a value of greater than 1. So if a stock has a beta of 1.2 and is benchmarked to the S&P 500, it is 20% more volatile than the broader measure.

If the S&P 500 rises or falls 10%, then the stock would conversely rise or fall 12%. The same would be true for portfolio beta. While there’s more downside risk with high-beta stocks, they can also generate bigger returns when the market rallies – a principle of Modern Portfolio Theory.

Low Beta

A low beta stock with a beta of 0.5 would be half as volatile as the market. So if the S&P 500 moved 1%, the stock would post a 0.5% swing. Such a stock may have less volatility, but it also may have less potential to post large gains as well.

Still, investors often prefer lower volatility securities. Low beta investment strategies have shown strong risk-adjusted returns over time, too.

Negative Beta

Stocks or portfolios with a negative beta value inversely correlate with the rest of the market. So when the S&P 500 rises, shares of these companies would go down or vice versa.

Gold, for instance, often moves in the opposite direction as stocks, since investors tend to turn to the metal as a haven during stock volatility. Therefore, a portfolio of gold-mining companies could have a negative beta.

So-called defensive stocks like utility companies also sometimes have negative beta, as investors buy their shares when seeking assets less tied to the health of the economy. A downside to negative beta is that expected returns on negative beta securities tend to be weak – even less than the risk-free interest rate.

Zero Beta

A stock or portfolio can also have a beta of zero, which means it’s uncorrelated with the market. Some hedge funds seek a market-neutral strategy. Being market-neutral means attempting to perform completely indifferent to how an index like the S&P 500 behaves.

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How to Calculate an Individual Stock’s Beta

For investors, calculating the beta of all their stock holdings can be time consuming, and typically, financial data or brokerage firms offer beta values for stocks.

But if you wanted to calculate beta for an individual stock, you’d divide a measure of a stock’s returns relative to the broader market over a given time frame by a measure of the market’s return by its mean, also over a specific time frame. Here is the formula:

Beta = covariance/variance

Covariance is a measure of a security’s returns relative to the market’s returns.

Variance is a measure of the market’s return relative to its mean or average.

Alpha vs Beta vs Smart Beta

Beta is one of the Option Greeks, terminology frequently used by traders to refer to characteristics of specific securities or derivatives in the market. Another commonly used Greek term is Alpha. While beta refers to an asset’s volatility relative to the broader market, Alpha is a measure of outperformance relative to the rest of the market.

Beta also comes up a lot in the exchange-traded fund or ETF industry. Smart Beta ETFs are funds that incorporate rules- or factor-based strategies.

What Impacts Beta?

A variety of factors impact an asset’s beta. In general, stocks seen as riskier than average typically feature higher betas. Stock-specific factors such as debt levels, aggressive management, bold projects, volatile cash flows, and even ESG factors can influence a stock’s idiosyncratic risk. Higher business risk, while stock-specific, can lead to a more volatile stock price than the overall market, hence a higher beta.

Higher betas often appear in particular sectors. There are even investment fund strategies that play on beta – you can buy funds that exclusively own high beta or low beta stocks. A stock’s sector, industry, geographic location, and market cap size all impact a stock’s volatility and beta.

Cyclical and growth sectors like energy, industrials, information technology, and consumer discretionary often feature high betas. Utilities, consumer staples, real estate, and much of the healthcare sector typically have low beta.

Small caps and stocks domiciled in emerging-market economies also often have a higher beta (compared to the U.S. large-cap S&P 500).

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Important Things to Know About Beta

1.    A stock’s beta may change over time. Because beta relies on historical price data, it is subject to change.

2.    Beta is not a complete measure of risk. It can be a useful way for investors to estimate short-term risk but it’s less helpful when it comes to considering a long-term investment because the macroeconomic environment and company’s fundamentals may change. In some cases, beta is not the best measure of a stock or a portfolio’s risk.

3.    Beta is an input when investors are using the Capital Asset Pricing Model (CAPM) — a way to measure the expected return of assets taking into account systematic risk. It’s a method that also looks at the cost of capital for investors.

4.    The estimated beta of a stock will be less helpful for companies that do not trade as frequently. Thin liquidity for a stock may bias its beta value since there is less robust historical price data.

5.    Beta does not offer a complete picture of a stock’s risk profile as it’s linked to systematic risk. Investors must also consider stock-specific risk when managing their portfolios.

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The Takeaway

As discussed, beta is a popular metric that investors use to measure a portfolio’s risk, or its sensitivity to price swings in the broader market. Knowing stock holdings’ betas can be important information when you’re building your portfolios.

You can calculate their portfolio beta using simple math as long as you’re able to obtain the individual betas for your stock holdings. While beta is a helpful tool to try to gauge potential volatility in a portfolio, its reliance on historical data makes it limited in measuring the complete risk profile of an asset or portfolio.

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FAQ

What is a good beta for a portfolio?

In a general sense, a good beta for a portfolio would be 1. That’s only a general guideline or rule of thumb, however, as it means that a portfolio’s value is roughly as volatile as the market overall.

What does a beta of 1.3 mean?

A beta of 1.3 means that a portfolio’s value is 30% more volatile than the overall market, which means its value will swing more wildly than the market.

Why is market portfolio beta 1?

Beta measures a portfolio or asset’s sensitivity relative to the overall market. If a portfolio’s beta is 1, it is equally as volatile as the market, not more or less so.

How do I reduce my portfolio beta?

Perhaps the simplest way to reduce your overall portfolio’s beta is to replace higher-beta assets within the portfolio with assets that have lower associated beta.

Is it possible to have zero beta portfolio?

It is possible, and would amount to a zero-beta portfolio, which means the portfolio itself has no systemic risk whatsoever. In other words, this portfolio would have no relationship to the overall movements of the market, and likely have low returns.

What is the difference between stock beta and portfolio beta?

A stock beta is a measure of an individual stock’s volatility, while portfolio beta is a measure of an overall investment portfolio’s volatility.

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Feb
24
2025
Compulsive or Impulsive Shopping: How to Combat It

Impulse Buying: Definition and Ways to Stop It

By | Budgeting & Goals, Financial Independence, money | Comments Off on Impulse Buying: Definition and Ways to Stop It

Impulse buying is defined as purchasing something on a whim, without having planned to do so. Most people are familiar with the feeling of impulse buying. Perhaps you go to the supermarket just to pick up some oat milk and wind up purchasing an array of pricey juices, crackers, and cheese as well, because everything looked so good. Or you walk through a favorite store on your way home from work and snap up a couple of pairs of shoes because there was a major sale going on.

Spending money is not only part of life, but it can also be a fun way to reward oneself from time to time. But those unexpected, “can’t resist” purchases can add up, make you feel out of control, and lead to blowing your budget. Read on to learn more about impulse buying and how to take control of it.

Key Points

•   The definition of impulse buying is making unplanned purchases on a whim. While this can be fun, this can lead to overspending and debt.

•   Common triggers for impulse buying may include loneliness, depression, boredom, stress, and FOMO, or fear of missing out.

•   Managing impulsive spending can involve setting a budget, avoiding triggers and places to encourage shopping, and practicing mindfulness to stay aware and in control of financial decisions.

•   Participating in a no-spend challenge can help break the cycle of impulsive buying and foster better spending habits.

•   Joining a support group or seeking professional help can provide additional resources and strategies to manage impulsive spending.

What Is an Impulse Buy?

Impulsive shopping tends to happen when a person gets caught up in the moment and spontaneously buys something. It’s a purchase without any forethought or planning, and it’s often not within a person’s budget.

People who impulse-shop are usually influenced by external triggers, such as seeing an item on sale or positively responding to a store’s atmosphere. Everyone indulges in some impulse-fueled retail therapy now and then. You might be just starting college and over-use your student checking account as you decorate your dorm room. Or you could be approaching retirement and think you deserve a new car as a reward for all your years of hard work.

However, when these immediate gratification purchases become habitual, the behavior can morph into something uncontrollable and financially damaging. Taken to an extreme, potentially dire financial issues could result, such as credit card debt, foreclosure, and bankruptcy.

When it has this kind of negative impact, it could keep you from achieving your long-term goals and be considered a disorder.

What Causes Impulse Shopping?

Buying something spontaneously can trigger a rush of dopamine, the body’s feel-good hormone. That’s why it feels so rewarding.

A variety of factors can trigger impulsive shopping. Your triggers are likely different from those that get your best friend to splurge. Some common causes include:

•   Feelings of loneliness and depression. Buying items can be an exciting mood-lifter; a kind of high.

•   Boredom. Just as mentioned above, buying things can spark joy and add interest to a blah day.

•   Stress relief. The idea of retail therapy can be real. Sometimes, if a person is having issues (a family argument, a rough day at work), and making an unplanned buy is both a distraction and a mood boost.

•   FOMO (Fear of missing out). Feeling as if you don’t want to miss out or as if we want to “keep up with the Joneses” can result in unexpected purchases. For instance, if a favorite influencer touts a new product on social media and says it’s almost sold out, you might click to buy it and be part of the “in crowd.” That’s FOMO spending in action.

•   Personal history. If you were raised in a family which often engaged in impulsive spending, they modeled that behavior for you and you may consider it normal.

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Examples of Impulse Buying

You may be curious about how people typically engage in impulse buying. According to a recent survey by Slickdeals conducted One Poll, spontaneous purchases totaled $151 per month on average among respondents.

Impulse Purchases in Everyday Scenarios

Are you curious about what constitutes an impulse purchase? Here are some common examples:

•   While waiting to purchase a new lipstick at a beauty retailer, you’re surrounded by sample sizes for sale so you scoop up several. When you reach the register and tap your debit card to pay, an extra $50 is whisked out of your checking account to cover the cost of your extras.

•   You head to the store to buy a new white shirt for work. When you get there, you notice there’s a “buy three, get one free” sale underway, so you decide to take advantage of it and leave the shop with four shirts vs. the one you intended to buy.

•   After coffee with a friend at a local bakery, you notice all the delicious breads behind the counter. Before leaving, you purchase a couple of pricey loaves, plus a scone and a cinnamon bun, because it all looks so good.

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If you’re curious about impulse shopping tends to stack up by category, here are details of the ways in which most people spend:

Percentage of People Who Bought the Item on Impulse

 Item Bought on Impulse
55% Clothing
50% Groceries
42% Household items
32% Shoes
23% Takeout
21% Books
20% Toys
19% Technology
18% Coffee

What Is the Difference Between Impulsive and Compulsive Shopping?

Impulse buying is somewhat different from compulsive shopping, though some mental-health professionals consider them to be aspects of the same issue.

As mentioned above, impulse shopping tends to be spontaneous. It “just happens” in the moment: You’re grocery-shopping and wind up buying some pricey ice cream and gourmet coffee beans.

With compulsive shopping, however, the person usually plans and invests time on their purchases, perhaps spending more energy and money than is desirable. This chart shows some key differences:

Compulsive

 Impulsive
Resembles addictive behavior Can develop into addictive-like behavior if left unchecked
Buying things regularly Buying is more occasional and situational
Shopping is planned and premeditated Shopping is unplanned and spontaneous
More internally motivated by uncomfortable emotions More externally motivated and influenced by shopping environments and marketing

How to Avoid Impulse Purchases

If impulse purchases are tipping into the danger zone and ruining your budget and financial fitness, take action. There is help. Consider these suggestions on how to get started if you wonder if you’re a shopaholic:

Paying Close Attention to Spending Habits

Figuring out your particular shopping triggers can help you avoid or eliminate them. For instance, when buying, do you use credit cards instead of paying with cash or a debit card? Make shopping a priority over paying bills? Grocery shop without making a list?

Being honest about how and why you may engage in certain overspending behaviors is vital to understanding the issue. Changing spending habits can then help you manage your finances better.

Setting a Budget

Creating and sticking to a budget allows you to gain control over your spending. A well-thought out budget will help with personal accountability and achieving financial discipline. Try to set yourself up with the flexibility to splurge sometimes. This will help keep you from feeling completely deprived.

One suggestion is to consider incorporating the 50/30/20 budget rule. This guideline recommends spending up to 50% of your after-tax income on must-haves (say, housing, car payments, utilities, healthcare, and groceries). Then, take 30% of your money and reserve it for wants such as dinners out, vacations, concert tickets, electronics, and clothing. The remaining 20% should be allocated for investments, an emergency fund, debt repayment, or savings.

The Role of Mindfulness in Reducing Impulse Purchases

Practicing mindfulness can also help reduce impulse buying. Several studies have shown that this practice can lessen the urge to act on what are deemed “consumerist impulses” and thereby help an individual be less prone to impulsive shopping.

To practice mindfulness, which is a kind of meditation, a person focuses on being present in the moment without judgment.

Recommended: 10 Personal Finance Basics

Minimizing Temptation

Here are some ways not to put yourself in situations that can trigger impulse buying:

•   Many stores are carefully designed to get you to shop and spend, perhaps to an extreme. If a store’s atmosphere — the design, the scents, the music — tends to get you impulse buying, avoid it. Don’t walk down the streets filled with your favorite shops; try to escape the triggers that make you shop too much.

•   If you often spend free time at the mall or online shopping, sign yourself up for a class, take up a new sport, volunteer, or find other ways to fill the hours.

•   Curbing social media exposure can help, too. Research suggests ads and posts from social media influencers and seeing purchases from people in your social networks may encourage a “keeping up with the Joneses” mentality, often leading to impulsive buying.

•   Also consider the way technology could be enabling impulse buys. In some ways, tech can be terrific; think of the way online banking has made handling your finances easier, whenever and wherever you are. But it can play a role in impulse buying: If you have your credit card saved on your mobile phone, that could enable one-click shopping on Instagram and other platforms, and that can lead to mindless spending.

Starting a No-Spend or 30-Day Savings Rule

A quick way to stop spending money is to freeze any non-essential spending for an entire month. Commit to a 30-day shopping ban on impulse buys such as clothing, make-up, tech gadgets, or take-out, and see how much extra money you have at the end of the month. The difference may be eye-opening and help you break the cycle.

Successfully controlling your spending can provide a feeling of accomplishment and a confidence boost and offset feelings of being bad with money. Participating in a no-spend challenge can even become a fun game; you can involve other budget-conscious friends and know you’re all in it together.

Joining a Support Group

Here’s another way to stop impulse buying for some people: National 12-step program support groups such as Debtors Anonymous (especially if you’ve racked up credit card debt) and Spenders Anonymous are also an option. They can connect you with others who are dealing with similar issues.

Seeking Some Professional Help

Individual counseling with a mental health professional can help you get to the emotional root of your buying issues. Psychotherapy, such as cognitive behavioral therapy (CBT), can effectively treat impulse shopping behaviors.

If you are getting into debt, losing sleep over your shopping habit, or often transferring funds because you’re teetering on the edge of overdrafting, it may be time to work with a qualified professional.

Recommended: Using a Personal Loan to Pay Off Credit Card Debt

The Takeaway

Impulsive buying can be a fun treat sometimes…or it can seriously affect your financial life. Taking positive, concrete steps is likely to help conquer the problem. Getting past this spending issue, whether by shifting your behaviors or seeking professional help, can be a positive move, both for you personally and for your bank account.

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FAQ

Is breaking a budget a sign of impulse shopping?

Breaking your budget is not necessarily a sign of impulse shopping. However, if you regularly deviate from your budget, spend money allocated for needs on wants or unplanned purchases, and find yourself saddled with credit card debt, you may need to rein in your impulse spending. Analyze your shopping habits and budget to understand your behavior better.

Is making an impulse purchase a bad thing?

The reality is, most of us make occasional impulse buys, and they are not always such a bad thing. However, if this kind of shopping becomes habitual and leaves you with debt, pay attention and take steps to improve the situation.

How do I limit impulse purchases?

One way to limit impulse purchases is to avoid stores or websites where you know you tend to overspend. Also, ask yourself, “Do I need this or do I just want it?” when tempted to make a purchase. If the answer is the latter, wait 24 hours, and see if you still really want it. Your desire may dwindle during that cooling-off period.

What Is impulse buying behavior?

Impulse buying involves making unplanned purchases, say, while heading home from work, at the supermarket to pick up necessities, or while spending a weekend afternoon downtown. Doing this occasionally isn’t a problem, but if you overdo it and are having trouble managing your budget and debt, it’s worth trying to minimize the habit.

Is impulse buying problematic?

Impulse buying in and of itself isn’t problematic; it’s okay to treat yourself to unplanned purchases now and then. However, if impulsive purchases are wreaking havoc with your budget, causing you stress, and accruing credit card debt, then it’s an issue to be managed.

Is there a connection between impulse buying and ADHD?

Some experts believe that people with ADHD are more prone to impulsive behavior, which can include spontaneous purchases. Impulse shopping can trigger a rush of the feel-good hormone dopamine, which those with ADHD may crave.

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Guide to Options Trading for Beginners

By | Growing Wealth, invest, Investing | Comments Off on Guide to Options Trading for Beginners

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

An option is a financial instrument whose value is tied to an underlying asset; this is known as a derivative. Instead of buying an asset, such as company stock, outright, an options contract allows the investor to potentially profit from price changes in the underlying asset without actually owning it.

Because options contracts may be much cheaper to come by than the underlying asset, trading options can offer investors leverage that may result in significant gains if the market moves in the right direction. But options are very risky, and also can result in steep losses. That’s why investors must meet certain criteria with their brokerage firm before being able to trade options.

What Is Options Trading?

Knowing how options trading works requires understanding what an option is, and what the advantages, disadvantages, and risks of options trading may be.

What Are Options?

Buying an option is simply purchasing a contract that represents the right but not the obligation to buy or sell a security at a fixed price by a specified date.

•   The options buyer (or holder) has the right, but not the obligation to buy or sell a certain asset, like shares of stock, at a certain price by a specific date (the expiration date of the contract). Buyers pay a premium for each options contract; this is the total price of the option.

•   The options seller (or writer), who is on the opposite side of the trade, has the obligation to buy or sell the underlying asset at the agreed-upon price, aka the strike price, if the options holder exercises their contract.

Options buyers and sellers may use options if they think an asset’s price will go up (or down), to offset risk elsewhere in their portfolio, or to increase the profitability of existing positions. There are many different options-trading strategies.


💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.

Why Are Options Called Derivatives?

An option is considered a derivative instrument because it is based on the underlying asset: An options holder doesn’t purchase the asset, just the options contract. That way, they can make trades based on anticipated price movements of the underlying asset, without having to own the asset itself.

In stock options, one options contract typically represents 100 shares.

Other types of derivatives include futures, swaps, and forwards. Options that exist for futures contracts, such as the S&P 500 index or oil futures, are also popular derivatives.

What is the difference between trading using margin vs. options? Having a margin account does offer investors leverage for other trades (e.g. trading stocks). But while a brokerage may require you to have a margin account in order to trade options, you can’t purchase options contracts using margin. That said, an options seller (writer) might be able to use margin to sell options contracts.

Recommended: What Are Derivatives?

What Are Puts and Calls?

There are two main types of options: calls vs. puts.

Call Options 101

When purchased, call options give the options holder the right to buy an asset.

Here’s how a call option might work. The options buyer purchases a call option tied to Stock A with a strike price of $40 and expiration three months from now. Stock A is currently trading at $35 per share.

If Stock A appreciates to a value higher than $40 per share, the option holder may choose to exercise the contract, or sell their option for a premium. If the value of Stock A goes up, the value of the call option should, all else being equal, also go up.

The opposite would also be true. If shares of Stock A go down, the value of the call should, all else being equal, go down.

If the options holder wanted to exercise their call option, with American-style options they have until the expiration date to do so (with European-style options, the option must be exercised on the expiration date). When they exercise, they can buy 100 shares at the strike price.

Put Options 101

Meanwhile, put options give holders the right to sell an asset at a specified price by a certain date.

Here’s how a put trade might work. A trader buys a put option tied to Stock B with a strike price of $45 and expiration three months from now. Stock B is currently trading at $50 per share.

If the price of Stock B falls to $44, below the strike price, the options holder can exercise the put. Alternatively, the value of the option would likely also rise in this scenario, as owners of Stock B might look to lock in profits and sell shares before the stock falls further. A scenario like that may give the option holder the choice of selling the option itself for a profit.

What Is the Put-Call Ratio?

A stock’s put-call ratio is the number of put options traded in the market relative to calls. It is one measure that investors look at to determine sentiment toward the shares. A high put-call ratio indicates bearish market sentiment, whereas a low one signals more bullish views.


💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

Options Trading Terminology

•   The strike price is the price at which the option holder can exercise the contract. If the holder decides to exercise the option, the seller is obligated to fulfill the contract.

•   With American-style options the expiration is the date by which the contract needs to be exercised. The closer an option is to its expiration, the lower the value of the contract. That is what’s called the time value.

•   Premiums reflect the value of an option; it’s the current market price for that option contract.

•   Call options are considered in the money, when the shares of the underlying stock trade above the strike price. Put options are in the money when the underlying shares are trading below the strike price.

•   Options are at the money when the strike price is equal to the price of the asset in the market. Contracts that are at the money tend to see more volume or trading activity, as holders look to exercise the options.

•   Options are out of the money when the underlying security’s price is below the strike price of a call option, or above the strike price of a put option. For example, if shares of Stock C are trading at $50 each and the call option’s strike price is $60, the contracts are out of the money.

For an out-of-the-money put option, the shares of Stock C may be trading at $60, while the put’s strike price is $50, so therefore, not yet exercisable.

Recommended: Popular Options Trading Terminology to Know

“The Greeks” in Options Trading

Traders use a range of Greek letters to gauge the value of options. Here are some of the Greeks to know:

•   Delta measures the impact of the price of the underlying asset on the option’s value.

•   Beta measures how much a single stock moves relative to the overall stock market.

•   Gamma tracks the sensitivity of an option’s Delta.

•   Theta is the sensitivity of the option to time.

•   Vega is the sensitivity of the option to implied volatility.

•   Rho is the sensitivity of the option to interest rates.

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*Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

How to Trade Options

The market for stock options is typically open from 9:30am to 4pm ET, Monday through Friday, while futures options can usually be traded almost 24 hours.

This is how you may get started trading options:

1. Pick a Platform

Log into your investment account with your chosen brokerage.

2. Get Approved

Your brokerage may base your approval on your trading experience. Trading options is riskier than trading stocks because losses can be steeper. That’s why not all investors should trade options.

3. Place Your Trade

Decide on an underlying asset and options strategy and place your trade.

4. Manage Your Position

Monitor your position to know whether your options are in, at or out of the money.

Basic Options Trading Strategies

Options offer a way for holders to express their views of an asset’s price through a trade. But traders may also use options to hedge or offset risk from other assets that they own. Here are some important options trading strategies to know:

Long Put, Long Call

In simple terms, if the buyer purchases an option — be it a put or a call — they are ‘long’. A long put or long call position means the holder owns a put or call option.

•   A holder with a long call strategy effectively locks in a lower purchase price for the underlying asset in case it increases in value.

•   A holder with a long put strategy effectively locks in a higher sales price for the underlying asset in case it decreases in value.

Covered and Uncovered Calls

If an options writer sells call options on a stock or other underlying security they also own outright, the options are referred to as covered calls. The selling of options helps the writer generate an additional stream of income while committing to sell the shares they own for the predetermined price if the option is exercised.

Uncovered calls, or naked calls, also exist, when options writers sell call options without owning the underlying asset. However, this is a much riskier trade since the exercising of the option would oblige the options seller to buy the underlying asset in the open market, in order to sell the stock to the option buyer.

Note that the seller wants the option to stay out of the money so that they can keep the premium (which is how the seller makes money).

Spreads

Option spread trades involve buying and selling an equal number of options for the same underlying asset but at different strikes or expirations.

A bull spread is a strategy in which a trader expects the price of the underlying asset to appreciate.

A bearish spread is a strategy in which a trader expects a decline in the price of the underlying asset.

Horizontal spreads involve buying and selling options with the same strike prices but different expiration dates. Vertical spreads are created through the simultaneous buying and selling of options with the same expiration dates but different strike prices.

Straddles and Strangles

Strangles and straddles in options trading allow traders to profit from a move in the price of the underlying asset, rather than the direction of the move.

In a straddle, a trader buys both calls and puts with the same strike prices and expiration dates. The options buyer would pocket a profit if the asset price posts a big move, regardless of whether it rises or falls.

In a strangle, the holder also buys both calls and puts but with different strike prices.

Pros & Cons of Options Trading

Like any other type of investment, or investment strategy, trading options comes with certain advantages and disadvantages that investors should consider before going down this road.

Pros of Options Trading

•   Options trading is complex and involves risks, but for experienced investors who understand the fundamentals of the contracts and how to trade them, options can be a useful tool to make investments while putting up a smaller amount of money upfront.

•   The practice of selling options to collect income can also be a way for writers who are seeking income to collect premiums consistently. This was a popular strategy particularly in the years leading up to 2020 as the stock market tended to be quiet and interest rates were low.

•   Options can also be a useful way to protect a portfolio. Some investors offset risk with options. For instance, buying a put option while also owning the underlying stock allows the options holder to lock in a selling price, for a specified period of time, in case the security declines in value, thereby limiting potential losses.

Cons of Options Trading

•   A key risk in trading options is that losses can be outsized relative to the cost of the contract. When an option is exercised, the seller of the option is obligated to buy or sell the underlying asset, even if the market is moving against them.

•   While premium costs are generally low, they can still add up. The cost of options premiums can eat away at an investor’s profits. For instance, while an investor may net a profit from a stock holding, if they used options to purchase the shares, they’d have to subtract the cost of the premiums when calculating the stock profit.

•   Because options expire within a specific time window, there is only a short period of time for an investor’s thesis to play out. Securities like stocks don’t have expiration dates.

Advantages and Disadvantages of Options Trading
Pros

 Cons
Additional income Potential outsized losses
Hedging portfolio risk Premiums can add up
Less money upfront than owning an asset outright Limited time for trades to play out

Test your understanding of what you just read.

The Takeaway

Options are derivative contracts on an underlying asset (an options contract for a certain stock is typically worth 100 shares). Options are complex, high-risk instruments, and investors need to understand how they work in order to avoid steep losses.

When an investor buys a call option, it gives them the right but not the obligation to buy the underlying asset by the expiration date. When an investor buys a put option, it gives them the right but not the obligation to sell the underlying asset by the expiration date.

The contracts work differently for options sellers/writers.

The seller or writer of a call option has the obligation to sell the underlying asset at the agreed strike price to the options holder, if the holder chooses to exercise the option on or before the expiration.

The seller of a put option has the obligation to buy the shares of the underlying asset from the put option holder at the agreed strike price.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

Invest with as little as $5 with a SoFi Active Investing account.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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2025
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How To Know When to Buy a Stock

By | Growing Wealth, invest, Investing | No Comments

Since investors don’t have (functional) crystal balls, figuring out how to know when to buy a stock, in an effort to time the market and generate the biggest return, is difficult. While you shouldn’t necessarily try to time the market, if you are trading and incorporating some knowledge and tactics around when to buy a stock as a part of your larger financial plan, you’ll want to do what you can to fine-tune your strategy.

Trading stocks, of course, is fairly risky, and investors will want to keep that in mind. But with some practice and knowledge, you may be able to figure out the best time to buy stocks, and other variables, to help you try to boost your portfolio.

Key Points

•   Timing the stock market is difficult, but understanding when to trade stocks can help your portfolio.

•   The best time of day to buy stocks is usually in the morning, shortly after the market opens.

•   Mondays and Fridays tend to be good days to trade stocks, while the middle of the week is less volatile.

•   Historically, April, October, and November have been the best months to buy stocks, while September has shown the worst performance.

•   Knowing when to hold or sell stocks depends on personal strategies, research, and confidence in the stock’s potential for growth.

The Best Times to Buy Stocks

As noted, it’s generally not a good idea to try and time the market. But that’s not to say that there are larger market forces at work that result in certain trends. With that in mind, there can be good times of the day, days of the week, and even months to buy stocks that could generate bigger returns – though nothing is guaranteed.

The Best Time of Day to Buy Stocks

First and foremost, remember when the stock market is open and when trading is occurring. The New York Stock Exchange and Nasdaq, two of the largest and most active stock exchanges, are open 9:30 a.m. to 4:30 p.m. ET, Monday through Friday.

With that, the best time of the day, in terms of price action, is usually in the morning, in the hours immediately after the market opens up until around 11:30 a.m. ET, or so. That’s generally when most trading happens, leading to the biggest price fluctuations and chances for investors to take advantage.

The Best Day of the Week to Buy Stocks

If investors are aiming to trade during times of relative volatility, then they’ll want to utilize a trading strategy that aims to crowd their activity near the beginning and end of the week. Monday is probably the best day to trade stocks, since there is likely considerable volatility pent up over the weekend.

That said, Friday can also be a good day to trade, as investors make moves to prepare their portfolios for a couple of days off. The middle of the week tends to be the least volatile.

The Best Month to Buy Stocks

best month to buy stocks

When thinking about the best months to buy stocks, examining historic performance can be helpful. Data showing average monthly returns for the S&P 500 between 1950 and 2023 shows that broadly, November, July, April, and October tend to be the best months to buy. Conversely, September and February have tended to see weaker performances than the other months.

Again, these “best times to buy stocks” in terms of times, days, and months aren’t guarantees of anything, but are merely based on historical performance. That can be good to keep in mind.

When Should You Buy Stocks

factors to consider when buying stock

There’s a difference between “can” and “should” – and investors trying to discern when they should buy stocks should really consider their personal preferences, risk tolerance, and investment strategies. The right time to buy a stock is when an investor has done their research and feels confident that a stock price will rise in the short or long term, and that they’re willing to hold onto it until it does.

It helps to be informed when considering whether to buy stocks, and one way to do that is to learn about the company itself. Interested investors can find many company’s financial reports and earnings reports from government databases or private company research reports.

While ultimately it may be a good idea to buy stocks across different industries in order to diversify, it sometimes helps to start with a business or industry one is familiar with. Knowing about the company can help put the earnings reports into context.

Understanding the value of stocks is often, if not always tied to understanding the business those stocks represent a share in. Is the company a good investment? Does it have sound financials and growth potential? Here are helpful questions to consider when contemplating buying a stock:

What is the price range at which you’re willing to buy? If an investor has a company in mind, setting a price range at which they would want to buy stock in that company may help inform their decision. One can do this through analysts’ reports and consensus price targets, which average all analyst opinions.

Does the stock appear undervalued? There are different ways to determine value. The most common valuation metric is a price-earnings ratio (or P/E), which takes the price per share and divides it by earnings per share. The lower the number, the less the value. Generally for U.S. companies, a P/E below 15 is considered a good value and a P/E over 20 is considered a bad value. You can also compare the company’s P/E to others in the industry.

Another way to look at value is a discounted cash flow (DCF) analysis, which takes projected cash values and discounts them back to the present. This ultimately gives an investor a theoretical price target; if the actual price is below the target, then in theory, it’s undervalued and a good buy.

Get up to $1,000 in stock when you fund a new Active Invest account.*

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*Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

When Is the Worst Time to Buy Stocks?

Just as there are the purported best times to buy stocks, there are also the worst times to buy stocks, too. Given that investors may be looking for relatively volatile times in the market to buy stocks, relatively calm periods during the trading day may be the worst times to buy. Those hours would be during the middle of the day, perhaps from 11:30 a.m. ET until 3 p.m. ET.

In terms of days of the week? Tuesdays, Wednesdays, and Thursdays may be worse than Mondays or Fridays, barring any market-moving news or other volatility-inducing events. Finally, September, February, and May tend to be the weakest-performing months for the stock market, dating back nearly a century.

How Do You Know When to Hold Stocks?

Knowing when to hold a stock often comes down to one’s investment strategy. With a passive investment approach, investors invest in various stocks with the intention of holding them for an indefinite amount of time. This is also known as a buy and hold investment strategy.

With this type of investing, investors attempt to match a market index such as the S&P 500 and the Dow Jones Industrial Average. So, they select stocks in that market index coinciding with the same percentages in that index.

One benefit of the buy and hold strategy is that the tax rate on long-term capital gains (from stocks that an investor has owned for more than one year) are much lower than that of short-term capital gains.

For many, if not most investors, if you’re going to buy a stock, it may be a good strategy to hold onto it for a while. When an investor buys an undervalued stock, it could take a few years for it to reach its “correct” valuation. And of course, there’s always a risk it will never reach what the investor has determined is the correct valuation.

Not everyone holds onto their stocks for a long time, but there are risks to day trading that may inspire some to become buy-and-holders.

How Do You Know When to Sell a Stock?

Just like how a decision to hold a stock largely depends on an individual investor’s specific strategy, so does the choice as to whether or not to sell.

Some investors rely on a rule of thumb that states that the stock market reaches a high point in May or June and then goes down over the summer until September or October. While that can sometimes be observed in overall market behavior — partially because traders (just like lots of people) go on vacation in the summer and partially because it’s a bit of a self-fulfilling prophecy — it doesn’t mean an individual stock will definitely go down over the summer.

Taking this advice, however, — and other, similar types of advice – should be taken with a grain of salt. Again, the choice of whether to sell a stock is up to you, and the research you’ve put into making the decision.

Recommended: When to Sell Stock

Test your understanding of what you just read.

The Takeaway

Knowing when to buy, sell, and hold stocks can be less confusing when an investor does the research into company health, overall market conditions, and their own financial needs as relates to personal short-term and long-term goals.

One of the easiest ways to buy and sell stocks or manage any investment portfolio is to open an online taxable brokerage account. This is often appealing to investors who want to take more of an active investing approach and buy and sell stocks. Investors would typically pay fees based on the account and the number of trades they make.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

Is it best to buy stocks when they are down?

The best time to buy a stock is when an investor has done their research and due diligence, and decided that the investment fits their overall strategy. With that in mind, buying a stock when it is down may be a good idea – and better than buying a stock when it is high. But there are always risks to take into consideration.

Should I buy stocks at night?

Investors can engage in after-hours trading, but there are unique risks to doing so, and orders won’t execute until the market opens. Interested investors may want to try after-hours trading to get a feel for it before fully incorporating it into their strategy.

What are the worst months for the stock market?

Based on past performance, the worst months for the stock market tend to be in the early fall and summer. September is usually the worst, but October, June, and August can be bad as well.

About the author

Rebecca Lake

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.



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What Is Max Pain in Options Trading?

What Is Max Pain in Options Trading?

By | Growing Wealth, invest, Investing | Comments Off on What Is Max Pain in Options Trading?

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

In options trading, the term “max pain” is short for “maximum pain price,” and refers to the strike price where the most open interest exists — open interest being the total number of active options contracts that haven’t been settled or closed.This max pain figure combines both puts and calls, representing the price at which option buyers face the highest potential losses at expiration.

Although max pain theory’s price movement predictions aren’t guaranteed, understanding how it works can help traders understand market dynamics at an option’s expiration.

Key Points

•   Max pain is the strike price resulting in the highest losses for option buyers at expiration.

•   Stock prices might move toward the max pain price as expiration approaches.

•   Calculating max pain involves assessing the dollar value of open interest for calls and puts at each strike.

•   Advantages include systematic trading and potential benefits from market behavior, but disadvantages exist.

•   Controversies arise from potential market manipulation by large institutions to influence stock prices.

What Is Max Pain?

Max pain, or the maximum pain price, is the strike price with the most open options contracts combining puts and calls.It is the strike price where the greatest number of options will expire out of the money, or worthless, causing the highest dollar value of losses among option buyers on a given stock at a specific expiration.

Some large institutional options sellers see an investment opportunity in writing options that eventually expire worthless, according to max pain theory. If options expire worthless, the seller of those options keeps the entire premium as profit. Option sellers face significant risk with this strategy, as they are obligated to fulfill the contract’s terms if exercised.

Max pain options trading stems from the Maximum Pain Theory. The theory contends that option sellers seek to hedge portfolios with options expiration. The Maximum Pain Theory also suggests an option’s price will arrive at a max pain price where the most options contracts held through expiration will experience losses. Bear in mind that an options contract that is not “in the money” at expiration is worthless.

Recommended: Popular Options Trading Terminology to Know

How Max Pain Works

The Maximum Pain Theory asserts that the price of the underlying asset is likely to converge at the maximum pain strike price. The max pain price is the strike with the greatest dollar value of calls and puts. As the expiration date approaches, the underlying stock price might “pin” to that option strike price.

Some day traders closely monitor the max pain price on the afternoon of expiration – usually the third Friday of the month for monthly options or each Friday for weekly options contracts.

Max Pain trading can be controversial, with some critics suggesting that attempts to influence stock prices near expiration could raise regulatory concerns (or even be considered market manipulation). Market participants disagree about whether or not Max Pain Theory works in practice. If a trader can predict which strike price will feature the greatest combination of dollar value between calls and puts, the theory states that they could profit from using that information.

Some market makers may consider Max Pain Price Theory when hedging their portfolios. Delta hedging is a strategy used by options traders — often market makers — to reduce the directional risk of price movements in the security underlying the options contracts. A market maker is often the seller of options contracts, and they seek to hedge the risk of options price movements by buying or selling underlying shares of stock.

This activity can cause the stock price to converge at the max pain price. Delta hedging plays a significant role in max pain trading.

How to Calculate the Max Point

Calculating the max pain options price is relatively straightforward if you have the data. Follow these steps to determine the max pain strike:

•   Step 1: Calculate the difference between each strike price and the underlying stock price.

•   Step 2: Multiply the difference calculated in Step 1 by the open interest for calls and puts at each strike price, determining the dollar value at that strike.

•   Step 3: Add the dollar value for both the put and the call at each strike.

•   Step 4: Repeat Steps 1 through 3 for each strike price on the option chain.

•   Step 5: The strike price with the highest dollar value of puts and calls is the max pain price.

Since the stock price constantly changes and open interest in the options market rises and falls, the max pain price can change daily. An options trader might be interested to see if there is a high amount of open interest at a specific price as that price could be where the underlying share price gravitates toward at expiration, at least according to Max Pain Theory.

Max Pain Point Example

Let’s imagine that a stock trades at $96 a week before options expiration. A trader researches the option chain on the stock and notices a high amount of open interest at the $100 strike. The trader performs the steps mentioned earlier to calculate the max pain price.

It turns out that $100 is, in fact, the max pain price. Since the trader believes in Max Pain Theory, they go long on shares of the stock, assuming that it will rise to $100 by the next week’s options expiration. Another options trading strategy could be to put on a bullish options position instead of buying shares of the underlying stock.

This hypothetical example looks simple on paper but many factors influence the price of a stock. For instance, there could be company-specific news issued during the final days before expiration that sends a stock price significantly higher or lower.

Macro factors and overall market momentum may affect stock prices, potentially reducing the influence of max pain dynamics. Finally, stock price volatility could cause the max pain price to shift in the hours and even minutes leading up to expiration.

Pros and Cons of Using Max Pain Theory When Trading

Max Pain Options Theory can be an effective strategy for options traders looking for a systematic approach for their options strategy. That said, not everyone agrees that Max Pain Theory works in practice. Here are some of the pros and cons of Max Pain Theory.

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Pros:

•   A systematic approach to trading options

•   Trades the most liquid areas of the options market

•   May benefit from price trends tied to behavior of other market participants

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Cons:

•   Lack of agreement supporting the theory

•   Stock prices don’t always gravitate to a max pain price

•   Other factors, such as market momentum or company news, could move the stock price

Options trading has become more accessible today due to low or no commission online investing. Previously, higher transaction costs made options trading less feasible for retail traders with smaller account sizes. It was not economical for average retail traders with small account sizes to buy and sell options using max pain theory.

Critics contend that there should be more regulatory oversight on max pain price trading — particularly on large institutions that could be manipulating prices. The regulatory future for these practices remains uncertain.

The Takeaway

Max Pain Theory is a framework in options trading that focuses on strike price, which may potentially result in the most losses for buyers at expiration. Options traders who calculate the max pain price, can use that information to inform their investing strategy, but outcomes are not guaranteed. While investors are not able to sell options on SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

What does max pain indicate?

Max pain indicates a specific strike price — specifically, It is the strike price that causes the highest dollar value of losses among option buyers on a given stock at a specific expiration.

What is max pain manipulation?

Some suggest that the max pain theory is related to market makers manipulating the overall options market, in an attempt to make the most number of options possible expire worthless.

Photo credit: iStock/valentinrussanov

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
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For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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